The Week in Review 4/11/2022
“Never miss out on an opportunity like a good recession.”
~ Jack Welch
Good Morning,
It was a rough week for growth stocks… as some now expect a recession in the US.
The talk now in financial circles is that the inverted yield curve (2 year and 10 year) is a harbinger of recession historically. While recessions have always had an inverted yield curve warning, not all inversions produced a recession.
The growth stocks -- large and small -- took it on the chin last week, as the 10-yr yield jumped 34 basis points to 2.71%. The Nasdaq Composite (-3.6%) and Russell 2000 (- 4.7%) fell more than 3.5%, the S&P 500 fell 1.3%, and the Dow Jones Industrial Average fell 0.3%.
The primary catalyst for interest rates was Fed Governor Brainard's (FOMC voter) expectations for the Fed's balance sheet to shrink considerably more rapidly than in the previous recovery, starting as early as May.
The March FOMC Minutes shared Ms. Brainard's hawkish mindset with the following note: Participants generally agreed it would be appropriate to reduce the balance sheet by $95 billion per month (about $60 billion for Treasury securities and about $35 billion for agency MBS) and that one or more 50 basis point increases in the fed funds rate could be appropriate at future meetings.
Shorter-dated rates pushed higher, too, with the 2-yr yield rising ten basis points to 2.54% amid rate-hike expectations. Longer-dated rates were further boosted by the March ISM Non-Manufacturing Index, which showed the Prices Paid Index (83.8%) hit its second-highest reading ever.
Essentially, the Fed news exacerbated concerns about the central bank potentially making a policy mistake that sends the economy into a recession, which would lower earnings prospects and valuations. The growth-stock valuations were pressured by the rapid rise in rates this week.
The S&P 500 information technology (-4.0%), consumer discretionary (-3.3%), and communication services (-2.7%) sectors, which are home to the mega-caps, were influential weights on the benchmark index. The industrials sector (-2.6%) was also weak amid continued bleeding in the transportation space.
Conversely, the energy sector (+3.2%) joined the defensive-oriented health care (+3.4%), consumer staples (+2.7%), utilities (+1.9%), and real estate (+0.8%) sectors in positive territory for the week.
Separately, it's worth reminding readers that the growth stocks did catch a speculative bid on Monday after Elon Musk disclosed a 9.2% stake in Twitter.
Mr. Musk was subsequently named to the company's Board of Directors and reclassified his stake to an active position, although this morning we learn that he will not join the board.
The S&P 500 ended the week below its 200-day moving average (4493) for those of us watching the technical underpinnings of the market.
Market Update…
- Oil Prices – Oil prices rose slightly last Friday with West Texas Intermediate rising 2.32% and settling at $98.26/barrel while Brent crude gained 2.19% and settled at $102.78.
- Gold – Spot gold rose 6% to $1,945.60 per ounce and was up 1.1% last week. U.S. gold futures ticked upward 0.6% to $1,948.4 per ounce. Silver finished the week at $24.823.
- U.S. Dollar – The dollar index posted its largest weekly percentage gain in a month, rising as high as 100.19. Euro/US$ exchange rate is now 1.106.
- U.S. Treasury Rates – The 10-year Treasury yield touched a three-year high at 2.73%.
- Asian shares were down sharply in overnight trading.
- European markets are trading mixed.
- Domestic markets are trading lower this morning.
Earnings season will be kicking off this week with reports from five big banks and financial firms on Wednesday and Thursday. Earnings reports across the board this quarter will be a good indication on how inflation is being managed and how it’s affecting companies’ bottom lines.
The last quarter of 2021 was strong for earnings with S&P 500 earnings growth reported at 31% – the fourth straight quarter of +30% growth – and 76% of S&P 500 companies exceeded street estimates. S&P 500 earnings are expected to be up 6.1% in the first quarter, but the financial sector is expected to see a decline of 22.9%, according to Refinitiv.
A good earnings season could push the indices higher and into positive territory for the year! The markets are closed this Friday for Good Friday.
Happy Easter!
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